SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 0-14719
SKYWEST, INC.
Incorporated under the laws of Utah 87-0292166
(I.R.S. Employer ID No.)
444 South River Road
St. George, Utah 84790
(435) 634-3000
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 2001
----- --------------------------------
Common stock, no par value 56,754,074
SKYWEST, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
As of September 30, 2001 and
March 31, 2001 3
Condensed Consolidated Statements of
Income For the Three and Six
Months Ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of
Cash Flows For the Six Months Ended
September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
2
PART I. FINANCIAL INFORMATION
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
September 30, March 31,
2001 2001
------------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 25,905 $ 27,202
Available-for-sale securities 260,948 252,827
Receivables, net 32,962 15,928
Inventories 21,502 20,069
Prepaid aircraft rents 17,997 25,494
Other current assets 16,021 13,472
--------- ---------
Total current assets 375,335 354,992
--------- ---------
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares 320,599 303,016
Deposits on aircraft 116,009 110,452
Buildings and ground equipment 77,698 61,040
--------- ---------
514,306 474,508
Less accumulated depreciation and
amortization (150,590) (136,512)
--------- ---------
363,716 337,996
--------- ---------
OTHER ASSETS 2,765 2,538
--------- ---------
$ 741,816 $ 695,526
========= =========
See notes to condensed consolidated financial statements.
3
SKYWEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, March 31,
2001 2001
------------- ---------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 10,463 $ 10,247
Trade accounts payable 57,683 46,499
Accrued salaries, wages and benefits 13,770 12,197
Engine overhaul accrual 7,295 13,946
Taxes other than income taxes 6,371 3,652
Air traffic liability 1,690 1,409
-------- --------
Total current liabilities 97,272 87,950
-------- --------
LONG-TERM DEBT, net of current maturities 68,567 73,854
-------- --------
DEFERRED INCOME TAXES PAYABLE 37,369 35,699
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 308,534 298,136
Retained earnings 250,887 221,097
Treasury stock (20,285) (20,285)
Accumulated other comprehensive loss (528) (925)
-------- --------
Total stockholders' equity 538,608 498,023
-------- --------
$741,816 $695,526
======== ========
See notes to condensed consolidated financial statements.
4
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ------------------------------
2001 2000 2001 2000
---------- ----------- ----------- ----------
OPERATING REVENUES:
Passenger $ 154,050 $ 137,182 $ 302,329 $ 265,585
Freight and other 1,490 1,449 2,875 3,433
---------- ----------- ---------- ----------
155,540 138,631 305,204 269,018
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Flying operations 67,047 54,032 125,114 103,370
Aircraft, traffic and passenger service 25,452 18,695 47,393 36,212
Maintenance 19,653 15,719 38,286 30,837
Promotion and sales 7,121 7,266 14,075 14,220
General and administrative 8,636 7,888 17,349 15,900
Depreciation and amortization 13,155 8,274 23,525 16,101
US Government airline assistance (5,657) - (5,657) -
Other - 84 - 531
---------- ----------- ---------- ----------
135,407 111,958 260,085 217,171
---------- ----------- ---------- ----------
OPERATING INCOME 20,133 26,673 45,119 51,847
---------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense - (1,125) - (1,704)
Interest income 3,627 3,266 7,616 5,716
Gain on sales of property and equipment - 390 - 470
---------- ----------- ---------- ----------
3,627 2,531 7,616 4,482
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 23,760 29,204 52,735 56,329
PROVISION FOR INCOME TAXES 9,265 11,389 20,567 21,967
---------- ----------- ---------- ----------
NET INCOME $ 14,495 $ 17,815 $ 32,168 $ 34,362
========== =========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ 0.26 $ 0.35 $ 0.57 $ 0.68
Diluted $ 0.25 $ 0.34 $ 0.56 $ 0.67
WEIGHTED AVERAGE COMMON SHARES:
Basic 56,517,000 51,614,000 56,325,000 50,568,000
Diluted 57,377,000 52,782,000 57,396,000 51,668,000
See notes to condensed consolidated financial statements.
5
SKYWEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the
Six Months Ended
September 30,
-----------------------------
2001 2000
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,168 $ 34,362
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,525 16,101
Gain on sales of property and equipment -- (470)
Maintenance expense related to disposition of rotable spares 519 581
Increase (decrease) in deferred income taxes 1,670 (2,769)
Nonairline depreciation and amortization -- 249
Changes in operating assets and liabilities:
Increase in receivables, net (17,034) (9,218)
Increase in inventories (1,433) (2,417)
Decrease in other current assets 4,948 4,211
Increase (decrease) in trade accounts payable 4,402 (60)
Increase in other current liabilities 4,573 6,128
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 53,338 46,698
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (7,724) (37,192)
Acquisition of property and equipment:
Aircraft and rotable spares (27,424) (37,111)
Buildings and ground equipment (16,671) (4,267)
Rental vehicles -- (875)
Proceeds from sales of property and equipment -- 4,442
Increase in deposits on aircraft and rotable spares (5,557) (3,776)
Increase in other assets (340) (247)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (57,716) (79,026)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 10,398 124,036
Proceeds from issuance of long-term debt -- 15,812
Reduction of long-term debt (5,071) (4,314)
Payment of cash dividends (2,246) (1,981)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,081 133,553
---------- ----------
Increase (decrease) in cash and cash equivalents (1,297) 101,225
Cash and cash equivalents at beginning of period 27,202 24,544
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,905 $ 125,769
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,264 $ 1,361
Income taxes $ 8,368 $ 20,196
See notes to condensed consolidated financial statements.
6
SKYWEST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Consolidated Financial Statements
The condensed consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. These condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the results of operations for the interim periods presented. All
adjustments are of a normal recurring nature. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company's Management believes that the following disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2001. The
results of operations for the three and six months ended September 30, 2001, are
not necessarily indicative of the results that may be expected for the
transition period ending December 31, 2001. The Company has elected to change
its fiscal year end to December 31 from March 31.
Note B - US Government Airline Assistance
In September 2001, the U.S. Federal Government passed the Air Transportation
Safety and System Stabilization Act (the "Act"). Under the Act, funds were made
available to compensate air carriers for direct losses suffered as a result of
any Federal ground stop order and incremental losses beginning September 11,
2001, and ending December 31, 2001, resulting from the September 11, 2001,
terrorist attacks on the United States. Management estimates that the Company
will receive up to approximately $11.4 million under the Act to partially
compensate for losses directly resulting from the September 11, 2001 terrorist
attacks. As of September 30, 2001, the Company had received approximately $5.7
million under the Act. The Company has elected to use the cash method in
accounting for the government assistance and to classify the amounts received as
a contra expense in the accompanying consolidated statements of income.
Note C - Available-for-Sale Securities
Available-for-sale securities are recorded at fair market value. The Company's
position in available-for-sale securities consists primarily of investment grade
bonds, bond funds and commercial paper. Unrealized appreciation and depreciation
has been recorded as a separate component of stockholders' equity.
Note D - Income Taxes
For the six months ended September 30, 2001 and 2000, the Company provided for
income taxes based upon the estimated annualized effective tax rate. At
September 30, 2001, the Company had recorded a net current deferred tax asset of
$8.2 million and a net noncurrent deferred tax liability of $37.4 million.
Note E - Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the periods. Diluted
net income per common share reflects the potential dilution that could occur if
outstanding stock options were exercised. The calculation of the weighted
average number of common shares outstanding is as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
------- ------- -------- -------
(In thousands) (In thousands)
Weighted average number of common shares outstanding 56,517 51,614 56,325 50,568
Effect of outstanding stock options............................ 860 1,168 1,071 1,100
------- ------- ------- -------
Weighted average number of shares for diluted net income
per common share........................................... 57,377 52,782 57,396 51,568
======= ======= ======= =======
7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company, through SkyWest Airlines, Inc. ("SkyWest"), operates a regional
airline offering scheduled passenger service with approximately 1,000 daily
departures to 76 cities in 18 western states and Canada. All SkyWest flights are
operated as either Delta Connection or United Express under code-sharing
arrangements with Delta Air Lines, Inc. ("Delta") or United Airlines, Inc.
("United"). Total operating revenues and passengers carried have grown
consistently from fiscal 1997 through fiscal 2001, at compounded annual
growth rates of approximately 21.2 percent and 20.9 percent, respectively. In
fiscal 1997, SkyWest generated approximately 1.4 billion available seat miles
("ASMs") and had a fleet of fifty 30-seat Embraer EMB-120 Brasilia turboprops
("Brasilias") and ten Canadair Regional Jets ("CRJs") at March 31, 1997. As a
result of additional aircraft acquisitions, SkyWest generated approximately 2.3
billion ASMs in fiscal 2001 with a fleet of 91 Brasilias and 17 CRJs at March
31, 2001.
SkyWest has been a code-sharing partner with Delta in Salt Lake City and United
in Los Angeles since 1987 and 1997, respectively. In April 1998, SkyWest
expanded its United Express Agreement to provide service as United Express in
United's Portland and Seattle/Tacoma markets and in additional Los Angeles
markets. In June 1998, SkyWest expanded its operations to serve as the United
Express carrier in San Francisco. Today, SkyWest operates as the Delta
Connection in Salt Lake City and as United Express in Los Angeles, San
Francisco, Denver and in the Pacific Northwest. SkyWest believes that its
success in attracting multiple code-sharing relationships is attributable to its
delivery of high quality customer service with an all cabin-class fleet.
Multiple code-sharing relationships have enabled SkyWest to reduce reliance on
any single major airline code and to enhance and stabilize operating results
through a mix of SkyWest controlled flying and contract flying. On SkyWest
controlled flights, SkyWest controls scheduling, ticketing, pricing and seat
inventories and receives a prorated portion of passenger fares. On contract
routes, the major airline partner controls scheduling, ticketing, pricing and
seat inventories with SkyWest receiving from its major airline partner
negotiated payments per flight departure and incentives related to passenger
volumes and levels of customer service. As of September 30, 2001, approximately
74 percent of SkyWest's capacity was in contract flying and 26 percent was in
SkyWest controlled flying. The Company plans to transition all of its Delta
Connection flying to contract flying effective October 1, 2001 for CRJ flights
and January 1, 2002 for the Brasilia flights. This transition will result in
essentially all SkyWest flights operating as contract flying as of January 1,
2002. As of September 30, 2001, approximately 56 percent of SkyWest's capacity
was under the Delta code and 44 percent was under the United code. The Company
has agreements to acquire an additional 111 CRJs, which includes 7 additional
CRJs being remarketed by the manufacturer, and options for an additional 119
CRJs with deliveries which begin in October 2001. These aircraft will be
allocated between the Company's Delta Connection and United Express operations.
Results of Operations:
- ----------------------
Operating Statistics
------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------------- ---------------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- -------- --------- --------- --------
Passengers carried 1,609,246 1,471,618 9.4 3,210,681 2,872,731 11.8
Revenue passenger miles (000s) 465,288 338,154 37.6 867,472 657,984 31.8
Available seat miles (000s) 736,633 575,957 27.9 1,383,761 1,141,366 21.2
Passenger load factor 63.2% 58.7% 4.5 pts 62.7% 57.6% 5.1 pts
Passenger breakeven load factor 55.0% 47.9% 7.1 pts 53.4% 46.8% 6.6 pts
Yield per revenue passenger mile 33.1 cents 40.6 cents (18.5) 34.9 cents 40.4 cents (13.6)
Revenue per available seat mile 21.1 cents 24.1 cents (12.5) 22.1 cents 23.5 cents (6.0)
Cost per available seat mile 18.4 cents 19.6 cents (6.1) 18.8 cents 19.1 cents (1.6)
Average passenger trip (miles) 289 230 25.7 270 229 17.9
For the Three Months Ended September 30, 2001 and 2000
8
Net income was $14.5 million, or $0.25 per share on a diluted basis, compared to
$17.8 million or $0.34 per share on a diluted basis for the same period last
year. The principal reason for the decrease in net income was due to the
disruption of service on September 11, 2001, when the FAA grounded all flights
as a result of the terrorist attacks in New York, Washington, D.C. and
Pennsylvania. Additionally, the Company experienced decreases in passenger
revenues as a result of the weakening economy. However, despite these factors,
consolidated operating revenues increased 12.2% to $155.5 million for the three
months ended September 30, 2001 from $138.6 million for the three months ended
September 30, 2000.
Passenger revenues, which represented 99.0% of consolidated operating revenues,
increased 12.3% to $154.0 million for the three months ended September 30, 2001
from $137.2 million or 99.0% of consolidated operating revenues for the three
months ended September 30, 2000. The increase was due primarily to a 37.6%
increase in revenue passenger miles as the Company continues to increase its
services with its code-sharing partners and took delivery of eight CRJs. Five
were scheduled deliveries and three were remarketed by the aircraft
manufacturer. Seven of these aircraft were placed in service under the Delta
Connection operation and one was placed in service under the United Express
operations. Additionally, during the three months ended September 30, 2001,
three Brasilias were returned to the lessor due to normal lease expirations. All
three Brasilias were flown under the United Express operations. On
SkyWest-controlled flights, SkyWest continues its efforts to maximize revenue by
use of a sophisticated revenue management and control system which utilizes
historical booking data and trends to optimize revenue. However, revenue per
available seat mile decreased 12.5% to 21.1 cents for the three months ended
September 30, 2001 from 24.1 cents for the three months ended September 30, 2000
due to the change in flying mix and the September 11th terrorist attacks.
Passenger load factor increased to 63.2% for the three months ended September
30, 2001 from 58.7% for the three months ended September 30, 2000. The increase
in load factor was due primarily to the further development of code-sharing
relationships with United and Delta whereby SkyWest is experiencing higher than
average load factors in its new markets. The increase was also due, in part, to
refinements in SkyWest's flight schedules and continued operational
improvements.
Total operating expenses and interest increased 19.7% to $135.4 million for the
three months ended September 30, 2001 compared to $113.1 million for the three
months ended September 30, 2000. As a percentage of consolidated operating
revenues, total operating expenses and interest increased to 87.1% for the three
months ended September 30, 2001 from 81.6% for the comparable quarter ended
September 30, 2000. The total increase in operating expenses as a percentage of
consolidated operating revenues was primarily due to the service disruption
resulting from the September 11th terrorist attacks on the US, and increased
infrastructure and build-up costs associated with new aircraft deliveries in
SkyWest's planned expansion.
Airline operating costs per available seat mile (including interest expense)
decreased 6.1% to 18.4 cents for the three months ended September 30, 2001 from
19.6 cents for the three months ended September 30, 2000 despite the September
11th events. The primary reason for the decrease is due to increased capacity by
regional jets which are less expensive to operate on an ASM basis than the
Brasilias. Other factors relating to the change in operating expenses are
discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 28.0% for the three months ended September 30, 2001 from
26.2% for the three months ended September 30, 2000. The increase was
principally the result of the service disruption resulting from the September
11th events and the Company's aircraft being grounded for approximately three
days. The average number of full-time equivalent employees for the three months
ended September 30, 2001 was 4,189 compared to 3,709 for the three months ended
September 30, 2000, an increase of 12.9%. The increase in number of employees
was due in large part, to the addition of personnel required for SkyWest's
anticipated expansion. Salaries, wages and employee benefits per ASM decreased
to 5.9 cents for the three months ended September 30, 2001 compared to 6.3
cents for the three months ended September 30, 2000. The decrease in costs was
due to the additional CRJs added to SkyWest's fleet and continued operational
improvements.
Aircraft costs, including aircraft rent and depreciation, increased as a
percentage of airline operating revenues to 20.6% for the three months ended
September 30, 2001 from 16.0% for the three months ended September 30, 2000. The
increase was due to the early termination and return of eight leases relating to
Brasilias previously flown under the United code. The termination of these
leases resulted in a $3.7 million write-off of unamortized engine overhauls
related to the aircraft. Management believes it will not have any further
liabilities or expenses associated with these lease terminations. Aircraft
costs per ASM increased slightly to 4.4 cents for the three months ended
September 30, 2001 from 3.8 cents for the three months ended September 30,
2000. The increase in costs was due to the $3.7 million write-off, a higher mix
of new aircraft within the fleet and build-up costs associated with the
delivery of these new aircraft.
Maintenance expense increased as a percentage of airline operating revenues to
8.6% for the three months ended September 30, 2001 compared to 7.6% for the
three months ended September 30, 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The increase was due primarily to airline operating revenues increasing only
12.2% period over period, maintenance expense increasing 27.2% period over
period and general maintenance costs in connection with the return of three
Brasilias through lease termination. However, maintenance expense per ASM
remained constant at 1.8 cents for both periods.
Fuel costs decreased as a percentage of airline operating revenues to 12.6% for
the three months ended September 30, 2001 from 12.8% for the three months ended
September 30, 2000. This decrease was primarily due to the average price of fuel
decreasing 18.9% per gallon to $1.03 from $1.27. Fuel costs per ASM decreased to
2.7 cents for the three months ended September 30, 2001 from 3.1 cents for the
three months ended September 30, 2000.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
increased as a percentage of airline operating revenues to 21.0% for the three
months ended September 30, 2001 from 18.3% for the three months ended September
30, 2000. The increase was primarily the result of SkyWest aircraft being
grounded because of the September 11, 2001 terrorist attacks. However, other
expenses per available seat mile remained constant at 4.4 cents for both
quarters ended September 30, 2001 and 2000 due to the change in mix from the
thirty-seat Brasilias to the fifty-seat CRJs.
In September 2001, the U.S. Federal Government passed the Air Transportation
Safety and System Stabilization Act (the "Act"). Under the Act, funds were made
available to compensate air carriers for direct losses suffered as a result of
any Federal ground stop order and incremental losses beginning September 11,
2001, and ending December 31, 2001, resulting from the September 11, 2001,
terrorist attacks on the United States. Management estimates that the Company
will receive up to approximately $11.4 million under the Act to partially
compensate for losses directly resulting from the September 11, 2001 terrorist
attacks. As of September 30, 2001, the Company had received approximately $5.7
million under the Act. The Company has elected to use the cash method in
accounting for the government assistance and to classify the amounts received as
a contra expense.
For the Six Months Ended September 30, 2001 and 2000
Net income was $32.1 million, or $.56 per share on a diluted basis, compared to
$34.4 million, or $.67 per share on a diluted basis, for the same period last
year. The principal reason for the decrease in net income was the disruption of
service on September 11, 2001, when the FAA grounded all flights as a result of
the terrorist attacks in New York, Washington, D.C. and Pennsylvania.
Additionally, the Company experienced decreases in passenger revenues as a
result of the weakening economy. However, despite these factors, consolidated
operating revenues increased 13.5% to $305.2 million for the six months ended
September 30, 2001 from $269.0 million for the six months ended September 30,
2000.
Passenger revenues, which represented 99.1% of consolidated operating revenues,
increased 13.8%, to $302.3 million, for the six months ended September 30, 2001
from $265.6 million or 98.7% of consolidated operating revenues for the six
months ended September 30, 2000. The increase was due primarily to a 31.8%
increase in revenue passenger miles as the Company continued to increase its
services with its code-sharing partners and took delivery of 17 CRJs. Nine of
these deliveries were scheduled deliveries and eight were remarketed by the
aircraft manufacturer. Fourteen of these aircraft were placed in service under
the Delta Connection operations and three were placed in service under the
United Express operations. Additionally, during the six months ended September
30, 2001, five Brasilias were returned to the lessor due to normal lease
expirations. All five Brasilias were flown under the United Express operations.
On SkyWest-controlled flights, SkyWest continues its efforts to maximize
revenue by use of a sophisticated revenue management and control system that
utilizes historical booking data and trends to optimize revenue. However,
revenue per available seat mile decreased 6.0% to 22.1 cents for the six months
ended September 30, 2001 from 23.5 cents for the six months ended September 30,
2000 due to the change in SkyWest flying mix from and the September 11th
terrorist attacks.
Passenger load factor increased to 62.7% for the six months ended September 30,
2001 from 57.6% for the six months ended September 30, 2000. The increase in
load factor was due primarily to the further development of code-sharing
relationships with United and Delta whereby SkyWest is experiencing higher than
average load factors in its new markets. The increase was also due, in part, to
refinements in SkyWest's flight schedules and continued operational
improvements.
Total operating expenses and interest increased 18.8% to $260.1 million for the
six months ended September 30, 2001 compared to $218.9 million for the six
months ended September 30, 2000. As a percentage of consolidated operating
revenues, total operating expenses and interest increased to 85.2% for the six
months ended September 30, 2001 from 81.4% for the six months ended September
30, 2000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The total increase in operating expenses as a percentage of consolidated
operating revenues was primarily due to the service disruption resulting
from the September 11th terrorist attacks on the US, and infrastructure and
build-up costs associated with new aircraft deliveries in SkyWest's planned
expansion.
Airline operating costs per available seat mile (including interest expense)
decreased 1.6% to 18.8 cents for the six months ended September 30, 2001 from
19.1 cents for the six months ended September 30, 2000 despite the service
disruption resulting from the September 11th events. The primary reason for the
decrease was due to increased capacity by regional jets which are less expensive
to operate on an ASM basis than Brasilias. Other factors relating to the change
in operating expenses are discussed below.
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 27.1% for the six months ended September 30, 2001 from
25.8% for the six months ended September 30, 2000. The increase was principally
the result of airline operating revenues increasing only 13.5% period over
period as a result of SkyWest's aircraft being grounded because of the September
11th events, and salaries, wages and employee benefits increasing
19.4% period over period. The average number of full-time equivalent employees
for the six months ended September 30, 2001 was 4,111 compared to 3,612 for the
six months ended September 30, 2000, an increase of 13.8%. The increase in
number of personnel was due in large part, to the addition of personnel required
for SkyWest's expansion. Salaries, wages and employee benefits per ASM decreased
slightly to 6.0 cents for the six months ended September 30, 2001 from 6.1
cents for the six months ended September 30, 2000. The decrease in costs was
due to the additional CRJs added to SkyWest's fleet and continued operational
improvements.
Aircraft costs, including aircraft rent and depreciation, increased as a
percentage of airline operating revenues to 19.4% for the six months ended
September 30, 2001 from 16.3% for the six months ended September 30, 2000. The
increase was primarily due to the termination and return of eight leases
relating to Brasilias previously flown under the United code. The termination of
these leases resulted in a $3.7 million write-off, which represented unamortized
engine overhauls related to the aircraft. Management believes it will not have
any further liabilities or expenses associated with these lease terminations.
Aircraft costs per ASM increased to 4.3 cents for the six months ended September
30, 2001 from 3.8 cents for the six months ended September 30, 2000. The
increase in cost are due to the $3.7 million write-off, a higher mix of new
aircraft with in the fleet and build-up costs associated with the delivery of
these new aircraft.
Maintenance expense increased as a percentage of airline operating revenues to
8.6% for the six months ended September 30, 2001 from 7.7% for the six months
ended September 30, 2000. The increase was due primarily to airline operating
revenues increasing only 13.5% period over period, maintenance expense
increasing 26.5% period over period and general maintenance costs in connection
with the return of eight Brasilias through lease terminations.
Fuel costs increased as a percentage of airline operating revenues to 12.4% for
the six months ended September 30, 2001 from 12.2% for the six months ended
September 30, 2000, while the average price of fuel decreased 7.8% per gallon to
$1.08 from $1.16. Fuel costs per ASM decreased to 2.7 cents for the six months
ended September 30, 2001 from 2.9 cents for the six months ended September 30,
2000.
Other expenses, primarily consisting of commissions, landing fees, station
rentals, computer reservation system fees and hull and liability insurance,
increased as a percentage of airline operating revenues to 19.6% for the six
months ended September 30, 2001 from 18.7% for the six months ended September
30, 2000. The increase was primarily due to SkyWest aircraft being grounded
because of the September 11th events. Other expenses per available seat mile
decreased to 4.3 cents for the six months ended September 30, 2001 from
4.4 cents for the six months ended 2000 due to the change in mix from the
thirty-seat Brasilias to the fifty-seat CRJs.
Liquidity and Capital Resources
The Company had working capital of $278.1 million and a current ratio of 3.9:1
at September 30, 2001 compared to working capital of $267.0 million and a
current ratio of 4.0:1 at March 31, 2001. During the six months ended September
30, 2001, the principal sources of funds were $53.3 million generated from
operations and $10.4 million generated from the issuance of common stock. During
the six months ended September 30, 2001 the Company invested $27.4 million in
flight equipment, $16.7 million in buildings
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
and ground equipment, $8.1 million in available-for-sale securities, and $5.6
million in aircraft deposits, reduced long-term debt by $5.0 million and paid
cash dividends of $2.2 million. These factors resulted in a decrease of $1.3
million in cash and cash equivalents.
The Company's position in available-for-sale securities, consisting primarily of
bonds, bond funds and commercial paper, increased to $260.9 million at September
30, 2001 compared to $252.8 million at March 31, 2001. At September 30, 2001,
the Company's capital mix consisted of 13% long-term debt and 87% equity
compared to 14% long-term debt and 86% equity at March 31, 2001.
The Company has significant long-term operating lease obligations, primarily
relating to its aircraft fleet. These leases are classified as operating leases
and therefore are not reflected as liabilities in the Company's consolidated
balance sheets. At September 30, 2001, SkyWest leased 98 aircraft under leases
with an average remaining term of approximately 9.0 years. Future minimum lease
payments due under all long-term operating leases were approximately $777.5
million at September 30, 2001. At a 7.5% discount factor, the present value of
these obligations would be equal to approximately $535.2 million at September
30, 2001.
The Company's total long-term debt of $79.0 million was incurred in connection
with the acquisition of Brasilia's and CRJs. Certain amounts related to Brasilia
Turboprops are supported by continuing subsidy payments through the export
support program of the Federative Republic of Brazil. The subsidy payments
reduce the stated interest rates to an average effective rate of approximately
3.74% on $24.4 million of the long-term debt at September 30, 2001. The
continuing subsidy payments are at risk if the Federative Republic of Brazil
does not meet its obligations under the export support program. While Management
has no reason to believe, based on information currently available, that SkyWest
will not continue to receive these subsidy payments from the Federative Republic
of Brazil in the future, there can be no assurance that such a default will not
occur. On the remaining Brasilia's long-term debt of $23.2 million, the average
effective rate is 3.82% at September 30, 2001 and the lender has assumed the
risk of the subsidy payments. The average effective rate on the debt related to
the CRJ aircraft of $31.5 million was 5.95% at September 30, 2001 and is not
subject to subsidy payments.
The Company spent approximately $44.1 million for nonaircraft capital
expenditures during the six months ended September 30, 2001, consisting
primarily of aircraft engine overhauls, rotable spare parts, buildings and
ground equipment and rental vehicles.
During the next twelve months, SkyWest will take delivery of 37 CRJs at an
aggregate cost of approximately $740 million. Depending upon the state of the
aircraft financing market at the time of delivery, management will determine
whether to acquire these aircraft through third party long-term loans or lease
agreements.
The Company has available $10.0 million in an unsecured bank line of credit with
interest payable at the bank's base rate less one-quarter percent, which was a
net rate of 5.75% at September 30, 2001. Management believes that, in the
absence of unusual circumstances, the working capital available to us will be
sufficient to meet its present requirements, including expansion, capital
expenditures, lease payments and debt service requirements for at least the next
12 months.
Seasonality
As is common in the airline industry, SkyWest's operations are favorably
affected by increased travel, historically occurring in the summer months, and
are unfavorably affected by decreased business travel during the months from
November through January and by inclement weather which occasionally results in
cancelled flights, principally during the winter months. However, SkyWest does
expect some mitigation of the historical seasonal trends due to an increase in
the portion of its operations in contract flying.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements and
information that are based on management's beliefs, as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate", "estimate", "project", "expect", and similar
expressions are intended to identify forward-looking statements. Although
Management believes that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, projected
or expected. Among the key factors that have a direct bearing on the Company's
operating results include, among other things, employee relations and labor
costs, changes in SkyWest's code-sharing relationships, fluctuations in the
economy and the demand for air travel, the degree and nature of competition and
SkyWest's ability to expand services in new and existing markets and to maintain
profit margins in the face of pricing pressures.
12
PART II. OTHER INFORMATION
SKYWEST, INC.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Aircraft Fuel
The Company is exposed to fluctuations in the price and availability of aircraft
fuel that affect earnings. The Company's financial statements reflect both the
cost of fuel purchased for SkyWest controlled flights, as well as fuel purchased
for contract flights which is subject to reimbursement by SkyWest's code-sharing
partners. Currently, the Company has limited exposure to fuel price increases
with respect to approximately 78% of available seat miles produced, due to
contractual arrangements with Delta and United. These major airlines reimburse
SkyWest for the actual cost of fuel on contracted flights. For illustrative
purposes only, the Company has estimated the impact of market risk using a
hypothetical increase in fuel price per gallon of 10% for the three months and
six months ended September 30, 2001 and 2000. Based on this hypothetical
assumption and after considering the impact of the contractual arrangements, the
Company would have experienced an increase in fuel expense of approximately
$683,000 for the three months ended September 30, 2001 and $618,000 for the
three months ended September 30, 2000. The Company would have experienced an
increase in fuel expense of approximately $1,476,000 for the six months ended
September 30, 2001 and $1,136,000 for the six months ended September 30, 2000.
The Company currently intends to use cash generated by operating activities to
fund any adverse change in the price of fuel.
Interest Rates
The Company's earnings are affected by changes in interest rates due to the
amounts of variable rate long-term debt and the amount of cash and securities
held. The interest rates applicable to variable rate notes may rise and increase
the amount of interest expense. The Company would also receive higher amounts of
interest income on its cash and securities held at the time; however, the market
value of available-for-sale securities would decline. At September 30, 2001, the
Company had variable rate notes representing 23% of the total long-term debt and
27% at September 30, 2000. The Company does not have significant exposure to the
changing interest rates on our fixed-rate long-term debt instruments, which
represented 77% of the total long-term debt at September 30, 2001 and 73% at
September 30, 2000. For illustrative purposes only, the Company has estimated
the impact of market risk using a hypothetical increase in interest rates of one
percentage point for both its variable rate long-term debt and cash and
securities. Based on this hypothetical assumption, the Company would have
incurred an additional $52,000 in interest expense and received $725,000 in
additional interest income for the three months ended September 30, 2001 and an
additional $49,000 in interest expense and received $625,000 in additional
interest income for the three months ended September 30, 2000. Additionally, the
Company would have incurred $97,000 in interest expense and received $1,446,000
in additional interest income for the six months ended September 30, 2001 and an
additional $60,000 in interest expense and received $1,204,000 in additional
interest income for the six months ended September 30, 2000. As a result of this
assumption, management believes the Company could fund interest rate increases
on its variable rate long-term debt with the increased amounts of interest
income.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on August 14, 2001. The
shareholders elected the following of directors to serve for one year and until
their successors are duly elected and qualified:
Name Shares Voted For
---- ----------------
Jerry C. Atkin 45,554,547
Sidney J. Atkin 47,860,696
J. Ralph Atkin 45,795,325
Mervyn K. Cox 47,858,935
Ian M. Cumming 47,071,892
Steven F. Udvar-Hazy 46,105,802
Hyrum W. Smith 47,819,643
Henry J. Eyring 47,819,839
Robert G. Sarver 47,408,203
13
PART II. OTHER INFORMATION
(Continued)
The shareholders also ratified the appointment of Arthur Andersen LLP as
independent auditors of the Company for the transition period ending December
31, 2001 by a vote of 48,360,093 for and 23,155 against.
Item 6: Exhibits and Reports on Form 8-K
a. Reports on Form 8-K - On September 20, 2001, the Company filed a
Current Report on Form 8-K to report operational updates and flight
schedule adjustments.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYWEST, INC.
Registrant
November 14, 2001 BY: /s/ Bradford R. Rich
-------------------------------------
Bradford R. Rich
Executive Vice President,
Chief Financial Officer and Treasurer
14